The J.P. Morgan’s inclusion of five GCC sovereign bonds, including Qatar and Kuwait, to its Emerging Market Bond Index (EMBI) from this month could lead to a significant demand for GCC sovereign bond issues. The JPMorgan’s emerging market bond index inclusion will widen the investor base and could lead to increased liquidity of GCC bonds and Sukuk.
‘Markaz’ noted yesterday in its “GCC economic and investment themes 2019”, that passive investment by index-tracking funds could amount to $30bn to $45bn of new demand , or about 30 percent of the value of outstanding GCC sovereign issuance. This would lead to a decline in sovereign spreads relative to international benchmarks, reducing the premium they pay relative to similar or lower rated issuers. For instance, this could amount to up to 30 basis points for Qatar. This passive demand would further ease access to global financial markets and likely lower funding costs, including corporate.
With international bond issuance by corporate also significant at about $40bn from 2014 to the first half of 2018 securing a reduction in financing costs could result in higher private investment and stronger and more broad-based economic growth. Easing access to global financial markets would help ease the impact of tightening global financial conditions and provide an important channel to mitigate the risk of further bouts of financial market volatility.
According to Markaz analysts, GCC bonds offer higher risk-adjusted returns than their emerging market peers. This is due to their robust credit metrics due to the presence of higher fiscal reserves, underpinned by strong sovereign ratings. Further, the correlation of GCC bonds with other asset classes remain low, which argues for their inclusion in investor portfolio. In the environment of increasing oil prices, the outlook could only get better.
Meanwhile, Bloomberg yesterday reported the GCC region’s bond sales are expected to slip in 2019 from last year’s $78bn as issuers turn cautious amid rising interest rates and market volatility. “Most of our clients have multiple funding options and will consider other alternatives” if bonds turn too expensive”, Bloomberg quoted Hani Deaibes, JPMorgan Chase & Co’s regional head of debt capital markets as saying in a report yesterday. Borrowers from the GCC, primarily sell bonds in dollars and two further interest rate hikes forecast in the US this year will add to costs. GCC syndicated loans surged 54 percent to $114.5bn last year, when foreign and local banks were flush with liquidity.”It’s difficult to expect similar volume this year than in 2018,” Deaibes said.
GCC countries combined have issued a quarter of all new debt sold by emerging markets in each of the last three years. Currently, they account for approximately 14 percent of total outstanding Emerging Market debt stock. The total domestic and USD denominated debt outstanding from GCC issuers is about $317bn.
According to ‘ Markaz’ analysts, four themes—Oil prices, GCC Banking M&A wave, Gulf Bonds; and Competitiveness of GCC economies– are expected to reshape the GCC’s economic landscape in 2019.
Source from: The Peninsula